Chained CPI: What It Is and How It Will Affect You

Monday, 8 Apr 2013 | 4:22 PM ETReuters

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In a bid to lure Republicans into a broad deficit-cutting deal, President Barack Obama is expected to formally propose this week a controversial change in how the government calculates inflation for Social Security and other federal benefits.

The move, to be included in the president's 2014 budget proposal, would also affect how tax brackets are calculated so that they rise more slowly. That in turn would affect taxpayers by moving them into higher brackets more quickly as their income increases.

Following are some facts about how moving to the new measure of the consumer price index, known as chained CPI, would work.

The Social Security retirement program and other government benefits are recalculated annually for cost-of-living adjustments based on changes in the consumer price index as measured by the Bureau of Labor Statistics.

Some economists argue that CPI does not accurately measure inflation because it does not account for changes in consumer buying habits. For example, if pork prices rise more than beef prices, consumers might buy more beef.

In 2002, the BLS introduced a chained CPI measurement designed to reflect such adjustments, as a complement to its traditional inflation gauge.

Obama and Republican leaders in the House of Representatives backed the idea during last year's fiscal cliff talks.

Opponents, including the AARP, said the chained CPI is a backdoor way to cut Social Security benefits.

Vulnerable populations will be exempted from the change under the White House plan, according to an administration official.

In March 2011, the Congressional Budget Office estimated that a chained CPI calculation would save the federal government $112 billion from 2012 through 2021.

The president's 2010 Simpson-Bowles deficit reduction commission called for a switch to chained CPI calculations for Social Security benefits.

The Tax Policy Center estimates that three-quarters of households would see a tax hike with a move to chained CPI. The switch would hit middle-class taxpayers hardest, with those making between $30,000 and $40,000 a year seeing the biggest bump.